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Basic Question 1 of 4
Given the interest rate tree below, what is the price of a three-year, annual-coupon bond with a coupon rate of 4% and par value of $100?
User Contributed Comments 4
| User | Comment |
|---|---|
| philjoe | three year bond with 4 coupons? |
| myron | @philjoe: The end of year 3's values are know for certain ($104). Given the interest rate at t = 2 (end of year 2) we can calculate the value at the end of year 2... |
| ashish100 | s math up there.. at time 0 calc doesnt add up right |
| davidt87 | they "+4" shouldnt be there at time 0. i really don't like how they've laid out the calculations. the coupon is added when discounting, not after discounting. they make it look like the coupon is missing from the price which isn't the case, and leads to stupid mistakes like the last line of the calculation |
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Learning Outcome Statements
describe the process of calibrating a binomial interest rate tree to match a specific term structure;
describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node;
compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice;
CFA® 2025 Level II Curriculum, Volume 4, Module 27.